Retailers such as Debenhams have been attempting to reduce their VAT bills by treating 2.5% of all credit card purchases made in their stores as a ‘merchant charge’, which is not subject to the sales tax.
If a purchase is made in cash, retailers pay VAT of 17.5% on 100pc of the value. But if a credit card is used, they pay VAT on only 97.5% of the value.
However, Customs has refused to pay rebates of VAT on the 2.5pc charges to retailers for the past three years, and its decision to disallow these claims was backed by a tribunal. It is estimated to have withheld £300m from retailers so far.
The High Court overturned that decision in June, ruling in favour of Debenhams, but Customs is now preparing to go to the Court of Appeal and has vowed to fight the challenge in every court in the land and in Europe.
Now, the EC has stepped into the fray, and its legislation could be in place as early as the end of the year. It must first be passed by the EU’s Council of Ministers.
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